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The impact of employee share plans on productivity

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The impact of employee share plans on productivity Damian Carnell GEO Conference - Netherlands 22/23 April 2001 Towers Perrin Agenda 1 The aims 2 The types of plan 3 ... – PowerPoint PPT presentation

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Title: The impact of employee share plans on productivity


1
The impact of employee share plans on productivity
  • Damian Carnell
  • GEO Conference - Netherlands
  • 22/23 April 2001
  • Towers Perrin

2
Agenda
  • 1 The aims
  • 2 The types of plan
  • 3 Costing/NPV analysis
  • 4 Academic and survey support
  • 5 Optimising the result
  • 6 The future

3
Aims
  • An Informed Board Decision
  • An Effective Share Plan
  • Multiple Intangible Benefits
  • Enhanced Shareholder Value

4
(No Transcript)
5
Share Plan Effects
Communication
Culture
Compensation
Motivation
Opportunity
Ability
Performance
Shareholder Value
6
  • FOCUS
  • Growth focus free ride safe
  • Forced shareholding free ride safe
  • Expensive
  • Encouraged shareholding commitment risk
  • Informed/easy investment choice commitment
    risk
  • TYPE
  • Options
  • Free shares
  • Share match/
  • Discounted Purchases
  • Share Purchase

7
Building the business case
  • Objectives
  • Design
  • Costs
  • Alignment with business and reward strategies
  • Employee Research
  • Academic Research
  • Implementation
  • communications
  • administration
  • timing

8
Broad Approach
9
Objectives
  • Examples
  • replacement for obsolete/ineffective programs
  • attraction and retention
  • alter competitive positioning of benefits
  • pay for performance (individual, team, business)
  • encourage share ownership/improve line-of-sight
  • benefit diversification
  • improve tax effectiveness of benefit spend for
    employees
  • equality

10
Costing/NPV Analysis
  • Valid to make cost clear
  • New issue of shares - assess on a B/S basis
  • Sensitivity analysis
  • NPV negative - as no benefits factored in, but
    helps funding/share choice
  • Benefits fall outside cost/NPV analysis and must
    be assessed separately

11
Benefit Costs
  • For a given design, may vary according to
    participation rates
  • - contribution levels
  • - performance
  • - timing of share purchase
  • Essential to understand potential variation in
    costs
  • - projections under various scenarios
  • - provide information on potential range as well
    as expected costs

12
Benefit costs
  • Design and cost analysis go hand-in-hand
  • a variety of design structures may be provided
    for a given cost
  • results of cost projections may impact on design

13
Alignment Business
Performance Framework
Employer perspective Increasing shareholder value
Employee perspective Meaningful, rewarding work
People strategies and the deal
People strategies and the deal
Staffing and selection strategy
Change management and communication strategy
Total rewards strategy
Pay
Benefits
External influences
Internal influences
Learning and Development
Work Environment
Aligned employee behaviours that yield improved
business results
14
Academic Evidence
  • Almost all positive
  • Various methodologies/performance indicators
  • Mainly Anglo-Saxon
  • Recent studies available...

15
Benefits Studies to 1990
16
Benefits Studies to 1995
17
Benefits Studies to 1998
18
Evidence Round-up
  • Proshare 1998
  • - explored how share ownership impacts
  • employee motivation attitude (300 interviewed)
  • - 66 employees check the share price once a week
    or more
  • - employees owning shares report
  • gain from success 73
  • aware of companys aims 55
  • less willing to leave 43
  • more involved 41
  • improved job performance 32

19
Evidence Round-up
  • Mehran/Hewitt 1999
  • - 382 publicly traded ESOP companies
  • - TSR up 12 compared to peer group
  • - ROA up 2.7 by contrast to control group
    (I.e.
  • 14 for 303 4-year survivors, but 6.9
    overall)
  • - 230 companies reporting on ownership culture
  • 82 of executives reported better corporate
  • performance
  • 18 of executives reported better employee
  • behaviours
  • 85 of companies improved information
  • access

20
Evidence Round-up
  • Towers Perrin benefit index 1999
  • - 13,000 managers and employees of larger UK
    firms
  • - 86 of managers and 66 employees believe
    that
  • when employees own shares, they are more
    committed
  • to success
  • - encouraging ownership of success is the second
    most
  • important people issue - after raising
    productivity
  • - aside from pensions, employee share schemes
    are the
  • area managers least want spending to be cut

21
Evidence Round-up
  • Sofres 2000
  • - 201 financial analysts in five European
    countries
  • interviewed
  • - 33.3 overall (higher in UK and Netherlands)
    are likely
  • to recommend ESOP companies as investments
  • seen as increasing worker motivation
    loyalty
  • - highlighted different perspectives across
    Europe
  • F, D B - improved social cohesion
  • UK NL - improved economic performance

22
Evidence Round-up
  • Conyon Freeman 2000 299 LSE listed companies
  • - companies with share ownership/profit sharing
    schemes more
  • likely to engage in consultation
    communication with employees
  • - productivity improved after introduction of
    scheme
  • approved profit sharing 17
  • share option plans 12
  • approved profit-related pay 4
  • approved SAYE -3
  • - survey of 1,800 companies productivity
    financial performance
  • are positively related to number of
    systems linking business
  • performance to modes of compensation

23
Optimising the Result
  • Improved compensation
  • Align employee behaviour with company values
  • Attract and retain talent in a competitive market
  • Be seen as a good employer
  • Help to change the culture of the company
  • Tax efficiency
  • What is your main focus?

24
Cost-effectiveness
  • Focus on the level of investment in the share
    plan and the
  • corresponding outcome effectiveness
  • Input
  • Cost of the plan
  • Outcomes
  • Improved perception of compensation
  • Higher levels of engagement
  • Better attraction and retention
  • Changed culture
  • Enhanced shareholder value
  • You need to decide the relative importance of
    each outcome

25
The Success of share plans can be Measured in
these Five Key Areas
Attraction and Retention
Shareholder Value
Culture
Compensation
Engagement
  • Turnover
  • Staffing efficiencies
  • Critical skill indices
  • Retention indices
  • Employer of choice
  • Perceived value of share plans
  • Analyst perceptions
  • Shareholder value
  • Return on human capital
  • Respect Recognition
  • Values Leadership behavior
  • Learning, Development, Growth
  • Improved quality and speed of decision making
  • Innovation
  • Employee commitment, and workplace perceptions
    Improved operational measures

ILLUSRTRATIVE
26
The Measurement Process
  • Two stages
  • design of an optimally effective share plan
  • tracking its effectiveness

27
Benefits of pre-launch
measurement
  • Pre-launch measurement and analysis provides a
    business case for the plan
  • accurate estimate of employee uptake of the
    scheme provides an
  • accurate costing for the scheme
  • perceptions of the scheme by different employee
    groups indicate
  • whether a one scheme fits all approach is
    sensible
  • employee perceptions of the value of the scheme
    relative to other
  • aspects of their remuneration package
    indicates whether the money
  • will be well spent on the scheme
  • uptake estimates and retention estimates
    together provide an optimal
  • scheme investment amount this gives a
    target level for the scheme
  • at launch or in future
  • and also provides
  • a baseline measures of engagement and culture
    show where gaps
  • between existing and desired states exist
    and indicate where
  • communications should be focused

28
Benefits of Measurement After
Implementation of the Plan
  • The post launch measures provide a balanced
    scorecard of outcomes that enables management to
  • know whether initial employee expectations of
    the plan have
  • been met
  • quantify in terms the effect on attraction and
    retention
  • know whether engagement has increased as a
    result of the
  • plan
  • know whether targeted culture changes have
    occurred
  • quantify in terms changes in shareholder
    value
  • know whether understanding and administration
    of the share
  • plan is satisfactory or if further effort is
    required
  • know if special attention is needed for
    specific employee
  • groups

29
The Future
  • Equity Pay will grow - a function of
  • - the new economy
  • - new ways of working
  • - retreat of paternalism
  • in consequence, money dedicated to plans will
    increase overtime, perhaps dramatically
  • because of heavier weight of money and because of
    its role in creating competitive advantage, the
    rigour with which proposals are tested will rise
  • old basis for plan approval will change - there
    will be more reliance on measurement, academic
    input and cost/benefit analysis
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